Required Minimum Distributions (RMDs) introduce a new set of rules once the owner of a retirement account reaches a certain age. While the concept is simple, the timing, tax consequences, and planning opportunities surrounding RMDs are often overlooked. The checklist below outlines the key rules, risks, and strategies retirees should understand when managing RMDs from their retirement accounts.
What Are Required Minimum Distributions?
An RMD is the minimum amount the IRS requires account owners to withdraw each year from certain tax-deferred retirement accounts. The government imposes RMDs because contributions and investment growth were allowed to be tax-deferred, and taxes must eventually be collected on those funds.
Accounts Subject to RMDs:
- Traditional IRAs (traditional / pre-tax portion)
- SEP IRAs and SIMPLE IRAs
- 401(k), 403(b), and other employer retirement plans
- Governmental 457(b) plans
- Profit-sharing plans and other defined contribution plans
Accounts Not Subject to RMDs (during your lifetime):
- Roth IRAs
- Roth employer plan accounts – Roth 401(k), Roth 403(b), Roth 457(b)
When Do RMDs Begin?
For retirement account owners, under current law:
- RMDs generally begin at age 73 for individuals born between 1951–1959 and age 75 for those born in 1960 or later.
- If you turn RMD age (73/75) during the year, your first RMD must be taken by April 1 of the following year.
- Every subsequent RMD must be taken by December 31 each year.
Important Timing Note
Delaying your first RMD until April 1 can result in two taxable distributions in the same year, potentially pushing taxable income into a higher tax bracket or increasing Medicare premiums.
How RMDs Are Calculated
RMDs are calculated using:
- Your account balance as of December 31 of the prior year
- A life expectancy factor from IRS tables
The formula is:
Prior year account balance ÷ IRS life expectancy factor = annual RMD
As you age, the life expectancy factor decreases, which means RMDs increase over time, often accelerating taxable income in later retirement years.
Penalties for Missing an RMD
Failing to take the full RMD can be costly:
- Penalty is 25% of the amount not withdrawn
- Reduced to 10% if fixed during the correction window and reported properly
- Penalties are assessed in addition to ordinary income taxes
While penalties can sometimes be waived for reasonable cause, relying on IRS forgiveness is risky and avoidable with proper planning.
Why RMDs Can Be a Problem
RMDs can create several unintended financial consequences:
- Higher marginal tax brackets
- Increased taxation of Social Security benefits
- Higher Medicare Part B and Part D premiums (IRMAA)
- Reduced tax efficiency for heirs
- Forced selling of investments during market downturns
For high-net-worth retirees, RMDs can turn tax-deferred savings into a tax planning challenge.
Strategies to Minimize the Impact of RMDs
1. Roth Conversions Before RMD Age
Converting a portion of traditional IRA assets to a Roth IRA, often through strategic multi-year conversions before RMD age, can:
- Reduce future RMDs
- Create tax-free income later in retirement
- Improve tax efficiency for heirs
2. Strategic Withdrawal Sequencing
Taking withdrawals from traditional accounts before RMD age, often during early retirement years, can:
- Smooth taxable income over time
- Reduce the size of future RMDs
- Prevent large tax spikes later in retirement
3. Qualified Charitable Distributions (QCDs)
For charitably inclined retirees age 70½ or older:
- Up to $100,000 per year (indexed for inflation beginning in 2024; $111,000 in 2026) can be donated directly from an IRA to qualified charities
- QCDs count toward RMDs but are excluded from taxable income
- Helps reduce AGI, Social Security taxation, and Medicare premiums
4. Managing Employer Retirement Plans
Some employer plans allow:
- Delaying RMDs if you are still working and do not own more than 5% of the company
- Rolling assets into an IRA for more flexible planning
Understanding plan-specific rules is essential.
5. Coordinating RMDs With Estate Planning
RMDs impact not only your taxes but also your heirs:
- Large pre-tax balances can result in higher taxes for beneficiaries
- Coordinating Roth strategies and beneficiary designations can improve intergenerational tax efficiency
Final Thoughts
Required Minimum Distributions are inevitable, but the consequences surrounding them are far from predetermined. With proactive planning, retirees can reduce the burden of RMDs, preserve after-tax income, and improve long-term financial outcomes.
The most effective approach is to view RMDs not as an isolated rule to manage once distributions begin, but as part of a comprehensive long-term financial plan. Decisions made in the years leading up to RMD age can significantly influence how much of your retirement savings ultimately stays in your pocket or passes efficiently to the next generation.
Have questions about your RMD strategy? Contact our team to schedule a conversation with a Goodman Financial advisor.
Goodman Financial Corporation is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including form ADV Part 2A filed with the SEC, can be found at https://adviserinfo.sec.gov/. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax, or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.This firm is not a CPA firm.
